Fiat is worth saving – Blockworks


It’s no secret that banks are broke.

From Silvergate to SVB, Signature to Credit Suisse, recent years have highlighted the great need for better banking practices worldwide. But instead of decrying the entire financial system as irreparable, we should focus on the core that drives it all.

Fiat money.

Fiat money itself is not broken. It is simply a tool tied to the systems around it.

As we continue to build, banks and associated traditional financial systems will continue to play an important systemic and commercial role in society; however, they will be driven towards more efficient business models by integrating decentralized blockchain-based solutions. But then I’m not talking about bitcoin, ether or the host of the other tokens of the moment.

Instead, it is blockchain that will introduce transparency and replace the opaque practices of the past. Instead of hidden costs and complicated processes, the new financial landscape will prioritize low-cost transactions and meet user needs. There will be a new streamlined channel for the flow of money throughout the economy. Policymakers will be enabled to modulate supply and demand more effectively, mitigating the adverse effects of economic fluctuations.

Do you feel like those paragraphs are Web3 fluff designed to capture clicks? Let me dive a little deeper.

Money is a tool for collaboration, a standard for storing and transferring value between people across distance and time. The dynamic and complex economies of the modern world call for money to expand and contract in response to how it ebbs and flows, accelerating during a crisis and slowing down when overheated.

In a modern economy, this is why money is needed: it can help cushion unpredictable economic fluctuations and protect long-term prices and financial stability.

When banks go bankrupt

Today, most of the world’s money supply is created by commercial banks when they make new loans. For example, in the UK about 97% of money is created by banks. These banks are systemically important financial information companies designed to help broker monetary policy. They are heavily regulated and centralized institutions in charge of payments, loans and money custody.

But banks break. Their inefficiency, bureaucracy and opacity contribute to the swings of boom and bust in the economy, for example due to monetary policy overruns and unmet financing needs in (among others) developing countries.

As a recent McKinsey study found, pre-pandemic US banks traded at about five times lower price-to-book than tech companies. The fact that capital markets expect significantly lower returns from banks than non-financial information companies is just one example of how inefficient they are in fulfilling their role in society.

Starting with Bitcoin (yes, part of the historical ledger but not the ultimate solution), Web3 showed the world how to manage digital assets peer-to-peer “without going through a financial institution”. intermediaries such as banks are unnecessary for payments. Ethereum extended this paradigm to every conceivable type of financial service involving digital assets, including lending, securities trading, factoring, and foreign exchange.

But where is, say, the trade-off between keeping banking systems alive and moving forward with new, efficient solutions?

Decentralization of fiat

The very first generation of DeFi services have already demonstrated the potential for significant efficiency gains compared to finance. For example, in a 2022 report, Ark Invest showed how leading DeFi services Compound, Uniswap, and MetaMask outperformed established traditional finance firms offering similar services by several orders of magnitude in terms of revenue per employee.

As the Ark study shows, DeFi services are unbundling the functions of traditional finance, including what banks do, into smaller, composable, stand-alone decentralized applications, which could deliver massive efficiencies and a wave of innovation in fiat-based financial services. unleash.

The main hurdles to its adoption are regulatory. First, consumer protection and anti-money laundering regulations need to be extended to DeFi, which is a relatively simple matter of adopting tools and methods from Wall Street. Second, fiat money must be able to flow freely within DeFi as “stablecoins.”

But what about the money itself?

Fortunately, a proven “stablecoin” standard already exists in a major jurisdiction – Europe. It is called electronic money (e-money) and serves as a “technically neutral […] digital alternative to cash.” First introduced in 2000, e-money is over-secured and digitally native, backed by high-quality segregated cash or bank deposits. However, unlike a bank deposit, e-money is a bearer instrument intended to serve as a medium of exchange.

Prior to Web3, dozens of European companies had spent billions of euros, pounds and dollars worth of electronic money online or as prepaid cards, including PayPal, Revolut and Wise. E-money has been put to the test – and then some.

The recently passed EU Market in Crypto-Asset Regulation requires “stablecoins” to be issued as e-money tokens, confirming e-money as a standard for fiat on-chain in a major jurisdiction.

With fiat on-chain, DeFi will serve as “open banking on steroids,” creating peer-to-peer alternatives to centralized financial institutions and services where none currently exist. For example, in developing countries, micro, small and medium-sized enterprises have an unmet financing need of $5.2 trillion each year, according to the World Bank: a gap for which DeFi’s decentralized and global architecture is much better suited. then populate the local, centralized financial institutions.

These solutions will be transparent where old ways were opaque, cheap where there used to be high costs, and built around user needs rather than outdated and unfriendly systems.

Through the evolution of Web3, there is a tangible path to freeing fiat money from the confines of traditional finance and freeing it up in decentralized finance. Together with e-money, Web3 — with its decentralized architecture and peer-to-peer capabilities — is poised to revolutionize the financial landscape. It presents a unique opportunity to reshape the way we handle money, transcending the limitations of traditional banking and fostering a more inclusive and efficient financial ecosystem.

However, embracing Web3 and transitioning into this brave new world is not without its challenges. Regulatory frameworks need to be adapted to accommodate this emerging technology, ensure consumer protection and address issues related to money laundering and financial security. In addition, comprehensive education and awareness programs are crucial to empowering individuals and businesses to safely navigate this new financial paradigm.

The way is clear and the stakes are high. It’s time to embrace this revolution, rescue fiat money from the clutches of traditional finance and unleash its full potential within the decentralized realm of DeFi.

Fiat is dead, long live fiat in DeFi.


Sveinn is co-founder and CEO of Monerium, the first company to issue on-chain fiat. An early adopter of cryptocurrency, Svein participated in and helped organize the first Bitcoin conference in London, UK, in 2012. He was also part of the advisory group that successfully campaigned for Icelandic voters to get taxpayer guarantees for private bank deposits to be rejected in 2011. plebiscite: setting a precedent against similar bank bailouts. Sveinn is the co-author of Minting Money With Megawatts, which was published as a cover story in IEEE in 2016. Prior to co-founding Monerium, Sveinn played a key role in establishing and managing companies in biotechnology, mobile software, telecom and venture capital. both in Europe and in the US. Sveinn holds a PhD in Physics from Boston University, an MS in Economic Systems from Stanford University, a BS in Applied Physics from Columbia University, and a black belt in karate.


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